“How much [insert relevant metric] do I need before I start raising, Jason??”

I get this all the time. 

When I started in venture capital back in 2012, one million dollars in MRR (Monthly Recurring Revenue) was the gold standard for attracting a Series A investment.  But things have changed. A clean answer like that is much more difficult to give.   

Over the past 5 years, new funding rounds like the pre-seed emerged. No code made MVPs require much less capital. And a flood of capital in 2021 lowered the bar around what was necessary only to have a market crash raise that right back up.

The new variables alongside the ups and downs of the market have caused founders’ heads to spin as they think about fundraising expectations.

For me?  Well it hasn’t made my job any easier either! 

The moving market makes it difficult to give the ultra-specific number that entrepreneurs are looking for when they ask what amount of traction they need to successfully raise a certain round of capital. 

Instead of offering specific numbers, my goal is to help founders understand the underlying logic that investors use when considering a startup's traction.

What Attracts Investors?

Of course founders need to tell a story of a big eventual outcome.

But the more tactical portion of getting there is all about the next milestone.  Part of fundraising for a specific round is being able to convince investors that their startup will be able to reach the next milestone with this money raised. That milestone can either be profitability or more likely the next round of capital.

When trying to raise capital, think about your current metrics in the context of showing you are on the path to reaching the next level. Forget the specific dollar amount or number of users.  Do those dollars show you’ve validated the problem or found product-market fit?  Does the current number of users show a repeatable growth channel?

Pre-Seed Rounds

When raising a pre-seed round of up to $1 million, entrepreneurs must convince investors that they have what it takes to raise a seed round next. Can you demonstrate you’ll be able to build and iterate on a product effectively? Find and engage customers?  Will a full team of talented individuals join you?

Seed Rounds

When raising a $1-3 million seed round, founders already have a product and at least initial signs of PMF with initial customers. At this stage, they must show they are on the path toward scaling fit as the next round will likely involve raising $5-7 million to lean into predictable growth channels and/or sales.

For a Seed we want to wrap your metrics in a different story. The revenue and user numbers need to show you’ve turned your eye towards growth. The hires and strategy you talk about should indicate PMF is no longer a question mark.

Traction Trends and Advice

As the market becomes more cautious, traction expectations might increase. However, instead of seeking a specific number, think about how to build a compelling story that will convince investors that you can reach the next set of milestones with the money raised.

A piece of advice I’ve always loved is to raise for the round you just passed by.  That’s a round that feels like a "slam dunk" to close, one where it seems almost comical that you'd be raising. Like “Huh, you’re raising a Seed. I would have guessed you’d be raising an A round!”  This is in contrast to stretching for a round that you might be a fit for if all the stars aligned and investors squinted a bit.  You might be able to get a round done like that but you’ll be threading the needle to be successful. 

Instead if you go for the round you just passed where investors will be excited at the implied pricing and the level-headedness of the founder, it will be far easier to generate demand which can naturally push round size and valuation upwards.  Better to target the slam dunk round and be pleasantly surprised that the round grew than to go after a round that is a stretch and be disappointed when you can’t close any money.

Ultimately, maximizing current traction is about considering what the traction represents and telling a story that answers investors' questions about your ability to reach the next funding round. 

Focus on demonstrating why your startup's potential is worth a VC’s investment, even if it doesn't match a specific traction target. I guarantee you they’re not sure what their specific traction targets should be either!

Takeaways

Assess Your Current Traction: Evaluate the stage your startup is at and identify the amount of traction you've gained. This includes factors like revenue, user growth, or even conversations with potential customers.Understand the Next Stage: Familiarize yourself with what investors are looking for at the stage you are trying to raise for, like a pre-seed or seed round. Find out the kind of traction or milestones they expect startups to have reached at these stages.Build a Convincing Narrative: Create a compelling story that combines your current traction with potential future developments. The narrative needs to demonstrate to investors that your startup can reach the next set of milestones with the funds raised.Aim for the "Slam Dunk": Approach fundraising by aiming for a round that feels like a sure thing, given the traction and progress of your startup. Even if it seems like an underestimation, this strategy can generate demand and potentially push the round size and valuation higher.Be Prepared to Adapt: Keep in mind that market conditions and investor risk appetite can change, affecting traction expectations. In times of market caution, you might need to provide more evidence of traction or a compelling idea of future growth.

Be chased,
Jason